What is India Post Payments Bank and how does it work? Here's a complete guide

The much-delayed launch of the India Post Payments Bank on Saturday has put the spotlight back on payments banks (PBs), the new bank model visualised by the Reserve Bank of India back in 2013-14. India Post Payments Bank is the sixth payments bank to commence operations in the country. The others in the space are two-year-old Airtel Payments Bank, Paytm Payments Bank and Fino Payments Bank - both launched last summer - and   recent-entrants Aditya Birla Idea Payments Bank and Jio Payments Bank.

Here are some frequently asked questions about payments banks and a look at how they stack up against each other.

What are payments banks?

They are banks offering most regular banking facilities such as remittance services, cash withdrawal/deposit, net banking, third-party fund transfers and mobile payments/transfers/purchases. However, they operate on a smaller scale compared to the normal banks and don't involve any credit risk. Their raison d'etre is financial inclusion; reaching out to the unbanked masses, which according to a recent Assocham-EY report is over 19% of our population.

How are they different from traditional banks?

The main difference between payments banks and traditional banks is that the former can only receive deposits and remittances. Payments banks cannot offer any financial products, say credit cards, of their own. They have to tie-up with other financial services providers to offer third-party products like loans and insurance to their customers. For instance, India Post Payments Bank has teamed up with financial services providers like Punjab National Bank and Bajaj Allianz Life Insurance for this purpose.

Payments banks can only accept deposits of up to Rs 1 lakh per customer in a savings/current account. Last but not the least, opening an account in a scheduled bank takes time because it requires a lot of documentation and verification. But PBs, being primarily driven by mobile technology, can simplify the process and make it quick and paperless.

Should you open an account with payments banks?

All of the above does not mean that payments banks are good only for low-income households, migrant workers and those living in the boondocks. Even if you already have multiple banking relationships with the likes of HDFC Bank, SBI and HSBC, you might consider opening a payments bank account, too, for the following reasons:

More convenience

A major USP of PBs is their wide distribution network since the model allows retail outlets, fuel stations, post offices, dairy milk collection centres and everything in between to double as a mini bank branch. So there is a good chance that your PB branch will be located a lot closer to you than your regular bank's nearest branch. Moreover, most of these banking points will operate well beyond normal banking hours.

Avail a zero balance account

Unfortunately the days of payments banks offering much higher interest rates than most scheduled commercial banks are over. Till last month, Airtel Payments bank was offering 5.5%, down from over 7% till February 2018. Currently, the interest rate offered by most of the operating payments banks is 4%. No information is available for Jio Payments Bank, but one can hope that parent Reliance Industries will pull its usual tricks - read offer higher interest rates - to stay ahead of the competition in this space, too. Nonetheless, this rate is still better than the 3.5% per cent typically offered by the state-owned and private banks for balances under Rs 50 lakh.

The icing on the cake: You never have to worry about paying a fine for not maintaining a minimum balance in the account. In contrast, most traditional banks limit the zero account balance option to the basic savings bank deposit accounts that they are mandated to offer to the underprivileged. Premium customers, who get access to benefits like preferentially-priced product and specialised investment solutions, have to maintain a minimum monthly balance of anywhere between Rs 3,000 to Rs 1 lakh, depending on the bank.

Best for cashless transactions

According to Nitin Bhatia, a leading real estate and personal finance blogger, a payments bank account provides best of both the worlds, mobile wallets and direct bank debit. After all, the focus of these banks is high-volume, seamless transactions in a secure technology-driven environment.

"Based on my personal experience, I can conclude that a payments bank account can come handy for monthly online payments. For example, if I earn Rs 1 lakh then I would spend approximately Rs 30,000 online towards grocery, electricity bill, other utility bills, shopping, mobile recharge, DTH recharge, etc. So I transfer this amount from my current account to my payments bank account for all my online spends," says Bhatia. "The best part is that I am earning higher interest on this amount till I actually spend it," he adds.

The merits of payments banks notwithstanding, it may not be advisable to forego your long-standing banking relationships and park your money in a payments bank. Apart from the obvious constraints like low deposit limits and the blanket ban on any type of direct lending, payments banks can't help you build credit worthiness. So it's best as a second - or third - account, with smart juggling.

What are the documents needed to open an account?

A savings account at any of the payments banks can be opened with just your Aadhaar number, mobile number and PAN card? If you don't have a PAN card, you will have to submit Form 60.

Which is the best payments bank - India Post, Airtel, Paytm, Idea or Reliance Jio?

The RBI prohibited Fino Payments Bank and Paytm Payments Bank from adding new customers since May and June, respectively, for non-compliance with full-KYC norms. There is still no clarity on when this restriction will be lifted.

With PTI inputs